The Pomp Podcast - #1055 Alysse Killeen On VCs Investing In Bitcoin Mining
Episode Date: July 21, 2022Alyse Killeen is a Founding Managing Partner at Stillmark, A Bitcoin focused Venture Capital fund. In this conversation, we discuss the Bitcoin market, the hardware and software investments into Bitc...oin mining, teaching self-custody, and why Bitcoin self-custody for is more in demand than ever for both retail and institutional buyers. ======================= Bullish is a powerful new exchange for digital assets that offers deep liquidity, automated market making, and industry-leading security. Combining the innovations of DeFi with the regulated environment of traditional finance, Bullish empowers users to trade with certainty and earn passively at scale across variable market conditions, in an environment backed by multibillion-dollar liquidity contributions from the Bullish Treasury. Visit bullish.com/pomp today to learn more. Note: Bullish is licensed by the Gibraltar Financial Services Commission. Virtual assets and related products are high risk. Consult your investment advisor and trade responsibly. Bullish is available in select locations only and not to U.S persons. Visit bullish.com/legal for important information and risk warnings. ======================= Since 2018 Copper has been at the forefront of institutional digital asset development. From award winning custody solutions, to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services, in lock-step with a rapidly changing world. No other infrastructure provider covers as many assets, across as many exchanges, with the speed and security that Copper can offer. To learn how Copper helps the world’s largest institutional investors secure their digital assets, head over to copper.co Copper - the unfair advantage. ======================= Coinchange is an automated wealth management platform that earns daily compounded yield for you. Earn up to 10% APY on a risk-mitigated basis – your payout doesn’t depend on the volatility of the market and there are no lockups or minimums. Register now at coinchange.io/pomp and get a welcome bonus of 40 USDC when you fund your account. =======================
Transcript
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What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening
to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off.
Elise Killeen is the founding managing partner at Stillmark, a Bitcoin-focused venture capital
fund. In this conversation, we talk about Bitcoin, mining, the development around the
protocol, and what is the current state of venture funding and entrepreneurship in Bitcoin.
I really enjoyed this conversation with Elyse, and I hope you guys enjoy it as well.
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Elise, I think you're here.
How are you?
Good morning.
How are you?
I'm doing fantastic.
People are already upset.
There doesn't appear to be a cat that is going to make an appearance.
there's not going to be today that is uh strike one um what uh what are you most interested in
right now like as you look at the bitcoin market obviously everyone seems to want to talk about
the price just because it's being somewhat volatile and there's uncertainty of the future
uh that's probably less interesting from like what's being built uh what are you seeing right
now that you're like man if people understood you know this specific uh kind of theme uh they'd be
surprised? Oh, there's a ton. On my side, I think I'm having a lot of conversations around mining
and the opportunities that will exist for entrepreneurs and also just frankly for
people, retail folks to participate in mining and to acquire Bitcoin through mining rather than
purchase. And we know that historically it's much more efficient in terms of costs to acquire
Bitcoin via mining. And so every cycle, I promised myself that it's the year that we're going to
get friends and family involved in mining. And every time we get too busy and then we look back
on the prior cycle and think how silly it was that we didn't spend more time and attention on
figuring that out. But what I'm hopeful in this next sort of batch of companies starting now in
the bear market and recession period is that we see companies emerge that can better facilitate
retail's participation in mining. And who knows, maybe in a decade, we see mining as part of a
diversified portfolio, even outside of folks that would consider themselves hardcore Bitcoiners.
And when you start to think about mining, there seems to be a ton of conversation around mining
death spiral, as there always is in bear markets, miners selling their Bitcoin that are publicly
traded. How much of your focus is on what I'll call it more institutionalized or kind of commercial
mining versus the individual just buying like a single machine and kind of plugging in and at
their house or something like that? Right. So of course, we're working as a generalist fund in the
Bitcoin space. So we invest across the board. And some of the pain points for miners are similar for
companies of all types. And we're seeing one now, which is, you know, effectiveness of treasury
management and planning finances and planning for various scenarios in treasury management.
And so miners, of course, have been primarily funded by debt.
And as a result of the debt markets drying up, we see miners needing to sell into a down
market selling BGC.
But this isn't something new, right?
We've seen this in prior cycles.
And so it's just something that we need to get through.
And of course, it also when companies have financial pressures, it opens up new opportunity spaces. Right. So we're looking to see if there'll be acquisition activity, if there'll be opportunities for new entrepreneurs to come in and to do things more efficiently or effectively or to serve clients, whether those be enterprise or institutional grade clients or retail folks better.
and so that's sort of you know where it's early right we're kind of we're sort of early into this
um this you know more like chaotic dynamic in the mining space controlled chaos and so we're
just looking to see how that shakes out and if there's opportunities for innovation there
and when you see the mining businesses themselves uh obviously the oil and gas industry the kind of
energy producers outside of bitcoin they've become major players uh in a variety of different
ways everything from uh down i think there's a houston oil and gas kind of bitcoin mining like
meetup that goes on uh in that area all the way to we've seen reports of some of the major energy
producers in the united states uh maybe doing pilots i think it's kind of how they've been
framed as they're kind of testing stuff out what are you seeing there with like the integration of
what maybe you and i would consider like bitcoin natives people who are trying to build these
mining facilities with some of these more kind of oil and gas or energy native organizations
Well, you know, so it's interesting. So absolutely in the past couple of months, we've seen a proliferation of perhaps creativity and what sort of energy sources and types can be applied to mining and vice versa.
And so it's not just oil and gas or and it's not just, you know, standard sort of known sustainable sources like wind and solar, but we're seeing everything from, you know, like compost materials to, you know, like tires and, you know, all sorts of materials that can be used to extract energy from.
and folks are looking at modeling the scenarios
to see if money can be made there.
And of course, when there's free energy,
there's an ability to monetize that with mining.
And so folks on the energy side
are, I think, getting really smart.
They've gone up the learning curve with Bitcoin.
They know that they can supplement
and add a revenue stream
to what they've already built by introducing mining,
which can, of course, as you know, be done intermittently. And so it's a great match for
lots of different modes of energy. And I think that, you know, people are making a variety of
experiments right now. And so I imagine in 18 months time, we'll have a lot more information,
but it's really fun to see the creativity, you know, and entrepreneurial thinking that's
happening in the space, including from folks on the energy side that probably have neither
thought of themselves as entrepreneurial or as Bitcoin native folks. But Bitcoin, of course,
is energy backed money. And so if you're in energy, you are, you know, soon to be if not
already in Bitcoin. And we're seeing that realization happen. When you start to look
at the mining, it seems like the technology is also drastically improved for it. I yesterday
was talking about mining. And I was like, man, when I first started messing around with mining,
S9s were like the cream of the crop, right? Like that was the best hardware you could get. Now,
I don't think I know a single serious miner that uses those because the technology has just
accelerated so quickly. What are you seeing on that front? Is that something you guys are
interested in investing in as the actual like hardware or do you stick mainly to more of the
software on the investing side? This is a great question. So a lot of folks are curious about
where venture capitals focuses and what arenas are a great fit. So historically, my work has
been focused on software, and that's not necessarily differentiating for Stillmark
versus other VC funds. So VC investors typically avoid hardware and focus on software, but
that's not true for all. And so if you are developing hardware, it's important, I think,
defined of an investor set that understands the economics of that, the different sort of
financial demands and how to work with you to make sure that your business is run most efficiently
so that you can grow at the quickest clip. Now, on the software side, of course, things are very
different when we're talking about serving a million people with software. Generally, we don't
have to add many operating costs to get from, say, $200,000 to a million. The incremental cost
of adding a new user are very small when we're talking about software. The opposite is true
when we're talking about hardware. And so they're pretty different businesses. But for Stillmark on
the mining side, there's starting to be more abundance of software opportunities. And so
that's where we're really focused, not to the exclusion of looking at opportunities for
proprietary mining or hosting or the development of new hardware. We could do those things. We'd
probably want to do that with a partner on the hardware side, meaning someone in venture that
had worked with hardware investments before. But more recently, we've seen software emerge to
really have a significant role in the mining space. So to give you a quick example of that,
this is from the portfolio. We led the seed round for Satoshi Energy, which is a company that
matches renewable energy, sustainable energy projects, wind and solar in Texas first to
mining. And so it adds a revenue stream basically to projects that have energy available when
they're not selling into the grid. And so this is an example of a really great use of Bitcoin's
intermittent nature. Wind is abundant at night. And we know that energy requirements are more
present during the day. And so it's a great time to mine when you have abundant energy that's not
called upon for other purposes. And Satoshi Energy is kind of trying to build the bridge there.
and help energy projects figure out how to best monetize their resources.
So that's an example of a software company in this space.
And I'm hoping that we will find others.
There's obviously opportunities to allow people to sort of interpret how their hardware is working
and to optimize their hardware as an example of where software can fit in.
And we've seen attempts at matching mining opportunities or a mining marketplace with retail participants.
And so my hope is that this continues to mature to sort of advance the sector of mining and that, you know, when there's a strong software play, we want to be right there.
What about you, Pomp? Have you invested in the mining space yet? It sounds like you have.
A lot of people probably don't know. That's how I got into cryptocurrencies.
I actually started – somebody pitched me mining back in 2016, and it wasn't pitched from like the crypto angle of like, hey, this is what Bitcoin or cryptocurrency or whatever it was.
It was just like, hey, these are data centers, right?
And they were kind of souped up.
My family had a background in data centers, so I understood it decently well.
And I started out mining with GPUs, mining ETH.
And then my friend and partner, Jason Williams, we started talking more about it and started
thinking about, you know, hey, how does this exactly work?
And at the time, he was the CEO of a company called PRTI, which is kind of an off-grid
vertically integrated power producer.
So what they do is they take used car tires, they basically burn it at really high heat
uh, in some, uh, uh, some technology on infrastructure that they built and it produces,
uh, oil, uh, gas, um, carbon, uh, and, um, uh, some other outputs. And then they're basically
able to produce power off the grid. And so the, uh, idea of the business originally was like,
why don't we just go sell it back to the grid and get paid, you know, whatever it is, three,
four cents, uh, per kilowatt hour. Instead, uh, we ended up actually building a, uh, a Bitcoin
mine there on site to basically take that power uh and just use kind of you feed in the tires you
create power and then you consume that power on site with uh with bitcoin mining and so it's
fascinating because a lot of people i think that you know do some sort of mining as like an
individual where it's not a business they started it's very much like uh kind of cloud computing
like oh i sent some money somewhere like somebody like got the machine they maybe sent me a picture
I can go online. There's like a dashboard, but like you, you don't see all of the like
operational complexities that go into it. And so, uh, I, you know, God, I don't know how much
money was spent slash wasted trying to figure out like the air conditioning. Like how do you keep
the machines cool in the summer of North Carolina? Right. Uh, how do you do, you know, uh, cable
management? How do you actually, uh, ensure that things are optimally, uh, optimally set up?
And what was unique is that like, I, you know, I understood enough to be dangerous, but like by
no means am i a electrical engineer am i uh you know in any way shape or form uh suited to to go
build one of these mining facilities myself but because of the business in the power production
component they had so many highly technical people there who literally built a off-grid
power production facility uh they were they're just geeking out they're like oh we could do this
and we could do this and like here's how you do it and like you really understood like kind of like
go to the metal and understand how these machines work and so it was frankly more than anything uh
it was just a pure education experience for me um and then you realize like i don't know how
big it wasn't you know huge uh but there's like thousands of these facilities hundreds of these
facilities around the world and that makes up you know the bitcoin uh decentralized network and so
it's just like a really cool experience um and then is that is that center still um mining it is
um the the idea is uh it's a great kind of concept of like off-grid vertically integrated
power production with the consumption of that power not going to the grid, but actually being
Bitcoin mining. One of the challenges is that it's incredibly expensive to build the off-grid
power production, right? You know, kind of low eight figures cost there. And so as they continue
to do that, part of their plan is to continue to build out these vertically integrated mines.
But it's just a capital game. And so I think what we're starting to see now is like, this is one of
the reasons why a lot of these miners are saying hey we can go and like race around the world and
try to find you know low-cost energy but you also know what might be pretty cool why don't we just
go to the energy producers and be like let's partner exactly right like you guys got the
energy we got the machines and knowledge like let's come together and you know we'll go be
great miners yeah exactly that's exactly right so that's you know that's one of the realizations
that satoshi energy had that that was something that you know was going to exist as this sort of
really reciprocally beneficial, healthy relationship and is there to sort of ease
the pain points of forming these new relationships, including sort of the legal complexities of it,
which I imagine that you're also very familiar with. But it's great to hear that you got into
the space through mining. And I sort of did. So, you know, one of the ways that I was really pushed
into Bitcoin in 2013 was that I happened to end up at a co-working space for entrepreneurs to help
one of our portfolio companies at the time. And I was sitting next to a guy that was mining like
with a machine on his desk. And so that was 2013. And that I did not start doing the exact same
thing is, you know, such a painful memory. And I'm sure in 10 years, I'm going to be thinking
the same thing that I don't have, you know, like a whole facility set up is probably,
you know, a bad decision for sure. But I, you know, I was also sort of pushed into the space
by the curiosity and fun really of mining. And so it's fun. It's nice that we share that same
story. How are you thinking about mining now? Have you seen entrepreneurship advance in the
space at all in a way that sort of clicks with you given your operating background yeah i mean i
my general sense uh is that there will be some you know kind of outliers that like somebody can
go build a great mining business uh from scratch and do it again uh my biggest takeaway i think
was just like how capital intensive it is and so now uh i kind of look at it as uh you either need
to have a significant technical advantage so you know did you create chips did you create some
basic? Did, do you have some kind of power production, you know, arbitrage, like what is
the technical advantage you have that can't be replicated or, or, uh, closely, uh, kind of
followed by others? Uh, the second thing is your brand new business, but you just have immense
access to capital, uh, and you're able to kind of bully the market a little bit with that capital
base. Uh, or the third thing, and actually where I think a lot of the value, uh, is going to accrue
over time, uh, is you either have a special relationship or you have the backing of, uh,
one of the large energy producers like you know if exxon mobile wants to get in the game
they are going to very quickly become one of the largest miners if not the largest miner in the
world uh and really the limiting factor there ends up just being like how quickly can they get enough
hardware right but they've got the energy they've got the talent they've got the capital like they
have all the ingredients it's just they don't produce the uh asics themselves and so they're
gonna have to figure out you know what the solution there is and so if you kind of run around the
world you're like okay cool you know you've got exxon you've got some of these uh uh businesses
but then like what happens when all of a sudden the middle east is like you know what i got a
great idea what if we don't have to transport the energy instead just like right here on site
we can go and like essentially become you know owners of uh this brand new digital you know
ecosystem like it's gonna happen yeah the competition will always be around the cheapest
source of energy like just as you said technological advancement or some sort of edge that you have
through proprietary technology and then of course just simple today the competition still exists
around simple operations the professional professionalization of mining I think is just
you know a few years old really that's one of the opportunities actually that Blockstream saw
you know that I'm on the board of directors at Blockstream and Blockstream has sort of built
this really, you know, robust mining operation that allows enterprise and financial institutions
to host with them in a professional way. And, you know, these are sort of really obvious
opportunities in the space that, you know, entrepreneurs are taking advantage of, like
Blockstream did with enterprise-grade hosting, Satoshi Energy has done in this matching marketplace
and data insights, software provision.
And now we're just, you know,
we're starting to see new ideas percolating.
And so, you know, I'm hopeful that Stillmark
will be able to partner with entrepreneurs
in this space for sure.
I think there's still a ton of opportunity.
For example, when you're talking about gas and oil,
large participants coming into the space,
they're going to need to find, you know,
the best hardware.
It's not just about, you know,
it's not just about access to hardware and ASICs, but a supply chain that, you know, is robust and
can scale with you and is stable and dependable. We know that miners have, you know, had a problem
with that in the past, and there's no reason to expect that that will be any different as
the hash rate grows through the participation of larger enterprise. And so it's, you know,
it's a really dynamic space and probably doesn't get enough attention. And I imagine that that will,
um, you know, shift in the going forward. Makes, uh, makes complete sense. My last question for
you is around self-custody. Uh, how do you think about, or how do you talk to, uh, entrepreneurs
or even just people that, you know, you talked to about Bitcoin, uh, in terms of, um, a hundred
percent self-custody, uh, 80% self-custody, and then use Bitcoin on some of the various platforms,
whether they're yield generation, or there's some sort of like regulated, you know, custody
solution? Like, how do you just think about the, I don't know, I call it the dream Bitcoin,
like allocation from like a custody standpoint? Well, that's an interesting question, because I
think for us, it seems like the default answer to that question is that companies want to have 100%
self-custody, with the exception, potentially with the exception of when there's known transactions
or sort of like reoccurring transactions that might happen that require, you know, a simpler
experience than multi-sig, you know, now provides. So self-custody has been, you know, it's one of
the conversations that comes up in a bear market. People have time to sort of think about how
they're managing their treasuries, how they're securing their BTC in the treasury. And then,
of course, individuals are thinking about, you know, sort of best practices and how to prepare
themselves for the next bull market or even just Bitcoin's ongoing maturation. And so self-custody
is generally the first thing that people think of. And it comes up in conversation for me quite
frequently. If people look at the Stillmark website, they'll often say we're using Kaza
for self-custody, and that includes businesses. And so I think that, you know, there's more
businesses now like Bitcoin native businesses launching that know that they want to include
Bitcoin in the treasury as well as a responsible, you know, custody management solution. And so,
you know, fortunately, the state of that portion of the market has matured to the point where,
you know you have options you have really good opportunities to have this easy experience of
managing your bitcoin and being your own bank and so you know i think that's sort of just at this
point is table stakes for companies that have bitcoin in the treasuries to to have a self-custody
solution that works for the company and where your business practices are can be as consistent as the
technology itself. And so what I mean by that is just that the way that if you have a multi-sig
self-custody solution, the operating practice behind it is known and is repeatable and is
something that can be maintained if you're switching, including if executives are switching
out. And so it's not, you know, what we like to see at Stillmark when we're looking at companies
that come to us and already have BTC in the treasury, we like to see that there's a secure
self-custody solution in place that includes multi-sig. But on top of that, we like to see
that there's a documented process of key management. And so that it's not dependent
on any one individual or even a set of individuals. It's just dependent on a repeatable process. And
so that would be, I think, an important part of treasury management and financial responsibility
And, you know, of course, we're seeing Bitcoin founders really sort of get that and take that seriously.
When you start talking to newbies, how do you get them to try self-custody?
We do a bunch of work with Ledger and I just hammer, I'm like, make it easy, make it easy.
How do you reduce friction?
How do you get that person who's like, what the hell is self-custody?
I've never heard of this before.
How do you get them to try?
Like, what do you do?
Well, you know, so that is such a good question.
I think I need to actually spend some cycles on this.
So what we used to do, frankly, is wait for Coinbase to make a mistake, people to feel
burned, and then you get them a ledger, right?
Or you help them onboard to Kaza.
And some of the mistakes, you know, I mean, I think that way, you know, or change of policy,
right?
And so, you know, people know what they want and expect from Coinbase or from other sort
of custody providers and those rules are changing. And so, and, you know, happen. It's always,
they've always sort of been in a state of flux. And so for those of us that advocate for self
custody and for the be your own bank solution that Bitcoin offers, we, you know, I think the
time to really help convert people is when there's a policy shift that doesn't resonate with people
or feels off. And so that's what I did in prior cycles. And in the current cycle, I think what
I'm hopeful for is that the signal rises above sort of the noise of the bull market and frankly
that of you know some altcoins and crypto spaces and part of that signal should be around
self-custody and by the way when we're talking about this we don't have to talk about it as
self-custody as multi-sig or with using any technical terms I think that you know we can
meme into existence, be your own bank, a bank in your back pocket, and creating a narrative
that feels more approachable and similar to the millennial experience of a neobank, for example,
is a way for Bitcoin self-custody to really win here, which of course is a win for the end user
and the person holding the Bitcoin. And then on top of that, of course, if you're holding your
in Bitcoin, there's just more you can really do with it. You can get more use out of it, utility.
And so that's sort of the secondary conversation to the self-custody talk.
Tom, are you switching friends and family over to ledgers and other self-custody solutions now
that we have some space in the bear market? So I'm not a believer that any strategy is 100%
the only right thing right and i kind of i kind of think of it like uh dollars right uh most people
have uh they have some payment apps they've got a bank account maybe they have multiple bank
accounts uh some of it they are investing like like there's a strategy of uh maybe not pursuing
decentralized or uh pursuing diversification for diversification sake but just naturally as you
use things and it has utility you end up having different applications interfaces use cases etc
And the way that I use Bitcoin is very similar to that. So some of it is in more secure kind of offline manner. Some of it is in areas where it's rehypothecated. Some of it is used to make investments. Some of it is used on an app like Strike to be able to send or receive with people like I end up using it in different ways.
And so when I think about that, it goes back to this idea of like 100% in one single thing is probably not the way that most people are going to interface with any asset, but specifically something that needs to serve as kind of this digital cash.
But what I do think is really important is helping people understand like one of the main value propositions of Bitcoin is the self-sovereignty aspect that, you know, not your keys, not your coin.
and so whatever that percentage is for you and everyone i think is different like understanding
how to do it and so the way that i actually start with folks is just like hey take five dollars
worth of bitcoin and just move it throughout the ecosystem buy it on an exchange move it into
self-custody put it into uh you know one of these like retirement platforms they go buy another five
dollars move that into you know cold store like just move it around and what you will find out
It's like, you're learning and then, Hey, you're going to make a mistake. Right. And if you lose
$5, like you'll be like, ah, damn, that was stupid. But like you lost five bucks. It's worth
the education. And so that's actually where I usually start is just like getting people to kind
of try to move it around. And one is like, it's cool. Cause there's like an aha moment. Like,
Oh wow. Like it just moved. Like, Oh, I see. Like I did that. Right. Um, and then the second thing
is like, there is something cool when, uh, people are like, you mean to tell me that like the
bitcoin is in my hardware wallet and nobody like i'm not relying on anybody you know yeah and
they're like that's badass right like there's this element of like this is cool yeah and people
people get that once when you're holding bitcoin yourself no one can change the rules on you and
so i think that that's something very special but you're absolutely right bitcoin should be able to
meet people where they're at and in the ways that they want to engage with it and so of course we
you know we all have um 10 bucks 20 bucks 100 bucks in our lightning wallets um but you know
i think that the foundation should be around the value and possibilities of being your own bank
and being your own bank of course it should include both a savings and a checking account
or something that feels like that and so there's absolutely a mix that can be had between you know
a ledger, another sort of self-custody solution, a hot wallet, and, you know, potentially a third
party custodian. But when you're using the third party custodian, you want to be doing so really
because you understand the trade-offs and feel that you're benefiting from that, not because
you feel locked into doing that because you can't be your own bank. And so, you know, I hope that
that's another sort of, you know, message that becomes broader, more broadly understood in this
um, in this time where we have more, more opportunity to focus on signal and education.
Yeah. I couldn't agree more. Where can we send people to find you on the internet or find out
more about Stillmark? I'm on Twitter at Elise Colleen and Stillmark is stillmark.com. And at
stillmark.com, we have email links for founders and also for other folks in the community to reach
out. Awesome. Elise, thank you so much for joining us. I always enjoy these conversations and we'll
definitely do it again. Thank you, Pomp. All right. Have a great day. You too.
Thank you.
